Erasing Your Hard Disk And Dumping It In A Canal Turns Out Not To Be As Wise A Move As It Sounds

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Today's sad news for Raj Rajaratnam and his constellation of illnesses is a solemn reminder to all of us that, however nice it is to generate outsize returns, nobody really wants to go to jail for it. Obviously the best way to do that is not to do anything illegal, but life being what it is, it's important to be prepared just in case you one day should find yourself in possession of a hard disk containing incriminating information. For one thing, you probably shouldn't get caught on a wiretap discussing how you destroyed it. More importantly, if you must try to profit from your illegally obtained hard disk, DON'T shop it to Teza Technologies, the dodgy Citadel spin-off that is keeping a candle burning in the window for when Sergei Aleynikov gets out of jail in 8 years.

Yihao "Ben" Pu seems to have been only about a C- student of past scandals. For one thing, he couldn't resist the strange allure of Teza. He did manage to avoid wiretaps when he allegedly stole a bunch of code from Citadel, but was tripped up because the buddy whom he charged with destroying the evidence (1) half-assed it, dumping it intact in a single, albeit watery, dumping spot, and (2) went to the Citadel's private investigators the next day and showed them where their diver (!) could find the hard drives:

A friend of Pu’s (Individual A) told agents that he was at Pu’s apartment with Pu and others twice on Aug. 26. That night, Pu, Individual A and another person loaded a desktop computer, hard drives and other computer equipment into Individual A’s car. On Aug. 27, Pu set up the computer equipment in Individual A’s apartment and allegedly spent portions of that day and the next day “cleaning” the hard drives. About 9 p.m. on Aug. 28, Pu allegedly called Individual A and told Individual A to “just dump everything” except for one particular hard drive that Pu had earlier identified for Individual A. Individual A told agents that he drove from his apartment looking for a place to dump the computer equipment before finally throwing a bag containing the hard drives given to him by Pu over a fence into the sanitary canal** off Sheridan Road near the Wilmette Harbor. The next day, Individual A gave the retained hard drive that Pu indicated was the most important to the office manager for his attorney. The same day, Individual A accompanied representatives of a private forensic investigation firm and others to the canal and he showed them where he threw the computer equipment. The next day, a diver recovered six hard drives from the canal in the same location identified by Individual A.

While Citadel fired and sued Pu in August, there's some symbolism in the fact that his criminal prosecution was launched today, coinciding with Raj's longest ever sentence for insider trading. The SEC and prosecutors will be happy to tell you that insider trading is eeeeeevil because it undermines "confidence that the markets are fair and the playing field is level," and that for hedge funds, it is "is akin to a performance-enhancing drug that provides the illegal ‘edge’ to outpace their rivals and make even more money."

So why is it so important to arrest this dude? Because he maybe stole code for Citadel's trading signals, or "alphas," the performance-enhancing drug that Citadel uses to get an edge over other investors and make even more money:

The alphas have inherent value to Citadel’s business and if another company gained access to the alphas, it might be able to develop or improve a competing business. Even if an individual trading alone obtained and made trades based on Citadel’s alphas, those trades would compete with Citadel’s trades and limit or eliminate the profits that Citadel could make using its proprietary trading strategies.

Former Citadel Employee Charged With Stealing Data on Trading Strategies [Bloomberg]

Former Citadel Employee Arrested for Theft of Financial Firm's Trade Secrets [US Attorney N.D.Ill., pdf]

** Disappointingly, the "sanitary canal" does not look as gross as it sounds.

Related

Let's Get One Thing Straight: Ken Griffin Only Accuses People Of Attempting to Gain A Competitive Advantage By Gaining Access To Proprietary Trading Strategies-- He Does Not Get Accused!

Back in October, a former Citadel employee, Yihao “Ben” Pu, was arrested and charged with "stealing trade secrets" from Ken Griffin (by "copying company data onto a removable storage device," and then attempting to sell it to Teza Technologies AKA the firm a bunch of ex-Citadel guys tried to join in 2009 before being sued for doing so by Griffin, as well as the the shop a former Goldman programmer, Sergey Aleynikov, went to jail for after giving it proprietary GS code). Now, because apparently people just can't help themselves, KG has been forced to levy another allegation of theft against some former employees who he believes took a piece of his property when they left for high-frequency trading firm Jump Trading. Does Griffin have actual evidence that they swindled him? No, not exactly. But he's got a hunch, and that hunch is based on the fact that since 2005, when people from Citadel's "tactical trading group" started leaving for Jump, "some of the strategies" employed by the TTG "have become less profitable" and are "behaving in a way consistent with their having been copied by rivals." So what KG would like a court to do is force Jump to turn over "personnel documents, strategy and trading records, and source code," which will prove him right and the Citadel defectors to be the plunderers he knows they are.  Evidence in hand, Griffin will then sue Jump and everyone named Ken Griffin will go home happy. The only issue that needs to be worked out is Jump Trading's cooperation, which so far is proving difficult to obtain. In fact, the firm is being downright unhelpful and not only that? Its legal team has accused Griffy-boy of being the thief, or at least trying to be. That's right: the way JT sees it, Citadel's new profitable algorithm development system is a two-step process that goes something like this: Step 1: Steal successful algorithms from rival firm. Step 2: Use them. In its response filing, Jump said that Citadel had no evidence that the algorithms had become less profitable because of any of Jump's actions. It said that any of the hundreds of other algorithmic trading firms could be at fault. "The petition is nothing more than a transparent attempt by Citadel to obtain a competitive advantage by gaining access to Jump's proprietary and confidential trading strategies," Jump's motion said. Your move, KG. Citadel Accuses Jump Employees Of Stealing Secrets [Reuters]